‘Home is where the risk is’


HNIs living in India and NRIs who are prospective immigrants all have a desire to reap the high returns in India and have an exposure to global markets. Yet many High Net Worth Individuals tend to invest most of their portfolio in domestic equities.

This can be attributed to the fact that Registered Investment Advisors in India have a macro knowledge of foreign equities and do not have any reciprocal arrangements with their counter parts in the global markets.

They have little or no information in areas such as legal restrictions for funds movement and additional transaction costs in making diversified allocations for deriving benefits to the investor. Because of this investor tend to be biased towards investing in domestic equities and risk aversion seems to prevent stepping into unknown or unfamiliar territories. The rewards can be lucrative with additional risks and may be worthwhile.

There are more than 60 International Funds in India which invest in companies located in Global, US, Asia Pacific, Japan, European and Emerging Markets.

In terms of taxation all International Funds are treated as debt mutual funds. Short term capital gains accruing within 3 years from the date of investment are taxed as per his or her slab while long term capital gains accruing after 3 years are taxed at 20.6% with indexation benefits. This provides greater tax efficiency than the 10% LTCG without indexation on domestic funds.
From an investment management perspective, investing in domestic equity funds with an exposure to International stocks within the 35% limit gives an added opportunity to diversify without compromising on the higher taxation.

For example, a domestic fund can have exposure to US multinationals like Microsoft, Twitter, Facebook who derive more than half of their revenues from overseas business. Buying mutual fund schemes with exposure to US or Asian multinationals can be an effective way for investors to get exposure to the global economy.

Investing outside India lacks direct correlation and can be an effective way to diversify to derive higher benefits. However, the risks to be considered are exchange rate risk and country risk due to political, social and economic stability. To understand which international funds to pick ask your Investment Adviser to help you.